The Gazette 1987

JULY/AUGUST 1987

GAZETTE

statutory agency and a practitioner- based regulatory body. Even an independent agency, such as the U.S. Securities and Exchange Commission (the S.E.C.) which had policed the American stock markets for 50 years does not operate independently of practitioner-based bodies such as the N.Y. Stock Exchange. In secon- dary trading, for example, the S.E.C. has had to delegate its control almost entirely to self- regulatory organisations. Despite extensive debate, the new rules have, in principle, been acknowledged as a major advance in investor protection. Even the most hardened advocates of practitioner-based regulation acknowledge the need for tight re- gulation in certain areas, for example, the so-called "over the counter" markets to which the public have access. The new Financial Services Act has been designed to regulate not only the U.K. Stock Exchange but all bodies which engage in various aspects of the investment business. Thus Life Assurance and Unit Trust com- panies, Investment Management companies and a whole range of Financial Intermediaries will fall

standards rather than rules and operates on the basis of a "club ethic". Its success rests implicitly on the ability of its members to keep out or so to "disoblige" undesirables that they can no longer carry on effective business. It is noteworthy, however, that under this system protection for the private client and small investor was largely incidental. Historically, the system has worked reasonably well, but it is debatable if it can do so in the post-deregulation market, where club rules are no longer in control. A strong case can also be made for practitioner-based regulation. The City employs a large number of people, earns an enormous amount of foreign exchange and pays a great deal of t ax. Modern technology, in combination with global deregulation, has made the City extremely vulnerable to com- petition from overseas financial centres. The imposition of a heavy handed legalistic system could easily drive business away ir- revocably. In addition, too many restrictions will tend to drive The case for practitioner-based regulation

business underground or offshore — a situation in which it will be im- possible to protect investors. This is the essence of the case for practitioner-based regulation. The Stock Exchange in London is quoted as a prime example of successful practitioner-based regulation. It has a reputation for strict adherence to high standards and, since 1973, has had a successful system which ensures compensation in the event of a Stock Exchange firm failure. In addition, there is the argument that practitioners will have more experience of the investment markets and will thus be able to regulate them more sensitively than civil servants, especially in areas where suspected malpractices are shadowy or legally hard to define. A good example of this is the practice of "churning". This occurs when clients are persuaded to do deals where the only merit is to generate commission. There is a fine line, however, between churning and simple bad judge- ment. Churning is thus not only hard to prove but also difficult to define. It cannot be assumed, however, that there is a straightforward choice between an independent

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